Gieve says tighter credit has offset rate cuts

By Christina Fincher

LONDON (Reuters) - Tightening credit conditions have offset the last three Bank of England interest rate cuts and this needs to be taken into account when setting policy, Bank of England deputy governor John Gieve said on Friday.

In a speech in London, Gieve also warned he could not rule out a recession.

Gieve said a squeeze in credit conditions was likely to intensify and if that were the only challenge, the central bank would be continuing its rate cutting.

"But of course, we do face another simultaneous shock, the sharp rise in commodity prices which is driving up inflation across the world. And that raises the question whether we should be raising rates rather than reducing them," he said in remarks delivered at the London Stock Exchange.

Gieve warned that the economic prospects for this year were "uncomfortable", with inflation expected to continue to rise sharply while growth tails off and unemployment picks up -- making a call on rate direction extremely tough for the Bank.

In a question and answer session following the speech, Gieve noted the Bank had not forecast recession as its central projection in its May forecasts but had shown it was a possibility. "I can't rule recession out," he said.

He noted action had shifted from the credit to the equity market and economic pain still had further to run.

"Am I satisfied with the state of tensions in financial markets? No, not at all. It's going on longer and it's more fragile and fraught than I would like," he said.